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Corporate Restructuring

Meaning of Corporate Restructuring


The corporate restructuring of a company
involves an activity to make the organization
more balanced, profitable and enable the
company to achieve its objectives in a more
simplified manner than previously.
The basic objective of corporate restructuring
is reorganizing the existing operations keeping
in view the continuance of business and to
improve firms profitability.
Goals and Strategies of Corporate
Restructuring
Profitability and ROI improvement
Higher economies of scale
Optimum Break- Even Point
Reducing Financial and Operational Risks
Continuous improvement in shareholder value
Areas of Corporate Restructuring
Financial: This involves decisions relating to acquisitions,
mergers, joint ventures and strategic alliances. This also
deals with restructuring the capital base and raise finance
for new projects.
Technological: This involves investment in research and
development and also alliances with overseas companies to
exploit technological strengths.
Marketing: This involves decisions regarding the product
market segments where the company plans to operate
based on its core competencies.
Man Power: This involves establishing internal structures
and processes for improving the capability of the people in
the organization to respond to changes.
Reasons for Corporate Restructuring
The globalization of business has compelled companies to open new export
houses to meet global competition. Global market concept has necessitated
many companies to restructure, because lowest cost producers only can survive
in the competitive global markets.
Changed fiscal and government policies like deregulation/ decontrol has led
many companies to go for new markets and customer segments.
Revolution in information technology has made it necessary for companies to
adopt new changes for improving corporate performance.
Many companies have divisionalised into small businesses. Wrong
divisionalization strategy has led to revamp themselves. Product divisions which
do not fit into the companys main line of business are being divested. Fierce
competition is forcing the companies to re launch themselves.
Improved productivity and cost reduction has necessitated downsizing of the
work force both at work and at managerial level.
Convertibility of rupee has attracted medium sized companies to operate in the
global markets.
Competitive business necessitated to have sharp focus on core business
activities, to gain synergy benefits, to minimize the operating costs, to maximize
efficiency in operation and to tap the managerial skills to best advantage of the
firm.
Reasons for Corporate Restructuring contd.
Economies of scales can be achieved by consolidating the capacities and
by expansion of activities.
By diversification of business activities, the minimization of business
risks is possible and it will enable the firm to achieve at least the
minimum target rate of return.
By restructuring the enterprise, a sick company can be successfully
revived and rehabilitated, and can be brought back to profitable lines.
With the integration of sick unit into the successful unit, the adjustment
of unabsorbed depreciation and write-off of accumulated loss is
possible, there by the successful unit can have strategic tax planning.
Corporate restructuring includes financial reorganization, by bring the
company to achieve a desired balance of debt and equity, thereby
reduce the overall cost of capital and financial risk.
The restructuring process will facilitate to have horizontal and vertical
integration, thereby the competition is eliminated and the company can
have access to regular raw materials and reaching new markets and
accessibility to scientific research and technological developments.
The application of information technology and responsibility accounting
concepts will facilitate to divide the total into strategic business units, a
better way of achieving the corporate goals.
Implications of Corporate Restructuring
The corporate restructuring will result in the following implications:
1. Reduced number of players in a market segment: Due to the
phenomena like mergers and acquisitions there will be only
companies with competitive edge left in a particular field. The
weak , inefficient, unviable companies will either die or merged
with other stronger players.
2. Emerging of new look companies: The companies coming out of
the process of restructuring and renewal exercises will be better
equipped to face the transitional companies or enter into alliances
with the same.
3. Healthy economic state of the nation: The new acquired better
health of the companies will directly contribute to the growth of
the national economy.
4. Social Discontent: Large cases of laying off, shutting down,
increasing number of sick units and increasing gap between the
rich and the poor may prove to be great national obstacles in the
path of growth of national economy. Also such phenomena will
lead to political stability.
Corporate Restructuring Process
The restructuring process can be divided in two
broader parts:

Hardware Restructuring

Software Restructuring
Hardware Restructuring
This involves redefining, dismantling or modification of
the existing structure of the organization. The major areas
of hardware structuring are as follows:
Identification of core Competency: This involves a
detailed of the inherent strengths of the company in
area vis--vis the competitors, as the competitors will
not take long time to enter into the area of another
weak competitor.
Flattening of organizational layer- To have the desired
responsiveness of the company towards company
policies or strategies, the organizational layers should
be as less as possible.
Hardware Restructuring Contd.
Downsizing: Over the years many organizations have
accumulated fat in terms of overstaffing. A lean
organization is the need of the hour to stay competitive in
the market.
Creation of Self-directed teams: These teams should be
such that they will not wait for the direction from the
higher ups. They will have a kind of autonomy in
functioning.
Bench marking: This is a continuous process of measuring
the products, services and business practices of a company
against the toughest competitors or those companies
recognized as the industry leaders. It is the search for
industry best practices that lead to superior performance.
Software Restructuring
This involves cultural and process changes required to create the more
collaborative environment needed for the renewal and growth of the
company.
Communication: By creating transparency in the organization and
convincing each employee about the need for the restructuring
exercise the same can be carried out in an effective way otherwise
it will run into all kind of problems. Good strategies are useless if
they can not be implemented and strategies can not be
implemented if people are not enthused about it.
Organizational Support: The vertical and horizontal relationship
through coaching, guiding rather than control. Competition
contention is a must for renewal.
Trust: It is very vital particularly in the context of risk taking
activities. On the organizational setup, it provides confidence
necessary for someone to let go of the security of business as usual
and take a leap in the belief that he will get a supportive hand in
the organization.
Software Restructuring contd.
Stretch: Tightly defined business boundaries
constrained the generation of new ideas. Thus,
stretch is the liberating and energizing element of
managerial context that raises individual
aspiration levels and encourages people to lift
their expectations of themselves and others.
Empowering People: The top down decision
making practice has to give way to ideas from the
bottom and decentralized decision making.
Replace the very concept of orders from the top
with ideas from the bottom.
Software Restructuring contd.
Training: To weed - out the outdated ideas from the minds
of people, a continuous training program has to be adhered
to. The different sized groups have got their own kind of
threats and opportunities, organizational efficiency/
inefficiency, constraints / limitations, advantages
disadvantages etc. Therefore, each group to have their own
variety of restructuring strategies.
Industry Foresight: This is different from the vision of the
company. Vision is generally very narrowly held by one or
two people and the rest of the organisation has to carry it.
Foresight comes from a lot of hard work to understand
what is changing such as technology, demographics,
regulations etc.
Techniques of Corporate Restructuring
Mergers: Merger is said to occur when two or
more companies combine into one company.
Merger is defined as a transaction involving two
or more companies in the exchange of securities
and only one company survives. When the
shareholder of more than one company, usually
two, decides to pool the resources of the
companies under a common entity it is called
merger. If as a result of a merger, one company
survives and others lose their independent entity,
it is called absorption.
Techniques of Corporate Restructuring Contd.

Takeovers: Takeover is a business strategy wherby


a person acquires control over the other
company- either directly by acquiring assets or
indirectly by controlling management. Takeover is
a part of business strategy for acquiring control
over another business to consolidate and acquire
large share of the market. The legal eyes of
raiders are on the lookout for cash cows and high
growth rate companies with low equity stake of
promoters.
Techniques of Corporate Restructuring Contd.

Divestitures:
Divestitures is a transaction through which a firm sells a
portion of its assets or a division to another company.
It involves selling some of the assets or division for cash or
securities to a third party which is an outsider.
The motive for divestitures is to generate cash for the
expansion of the other product lines, to get rid of a poorly
performing operation, to streamline the corporate firm, or
to restructure the companys business consistent with its
strategic goals.
Divestitures causes contraction from the perspective of
selling firms, it may not however decrease profitability. On
the contrary, it is believed by the selling firm by divesting
some of assets / division/ operating units as they are either
causing losses or yielding very low return.
Techniques of Corporate Restructuring Contd.
Equity Carve out:
An equity carve-out is a variation of a divestiture.It is a situation
where a parent company sells portion of its equity in a wholly
owned subsidiary to the general public or to a strategic investor.
An equity carve out enable the parent to generate cash inflow
which can be used for further investment.
In equity carve out the shares of the parent company are sold to
outside investors.
A carve-out effectively separates a subsidiary or business unit from
its parent as a standalone company. The new organization has its
own board of directors and financial statements. However, the
parent company usually retains controlling interest in the new
company and offers strategic support and resources to help the
business succeed.
Techniques of Corporate Restructuring Contd.
Slump Sale:
When a company sells or disposes the whole or
substantially the whole of the undertaking for a
predetermined lump sum amount as sale consideration
is called slump sale.
The acquirer may be interested in purchase of an
undertaking or part of it as a going concern and the
acquirer is not interested in taking the whole company
as a part of the transaction.
In fixing the selling price, the value of assets are not
individually counted and the liabilities are not
separately considered while fixing the slump price.
A business transfer agreement will be entered into
between the acquirer and seller and the hive-off deal
passes the title for both movable and immovable
properties and the related liabilities as a going concern.
Techniques of Corporate Restructuring Contd.
Strategic Alliances:
An alliance is defined as associations to further the common interests
of the members.
Strategic alliance is an arrangement or agreement under which two or
more firms cooperate in order to achieve certain commercial
objectives.
The motives behind strategic alliances is to reduce cost, technology
sharing, product development, market access, availability of capital,
risk sharing etc.
The concept of alliance is gaining importance in infrastructure sectors,
more particularly in the areas of power oil and gas.
The basic objective is to facilitate transfer of technology while
implementing large objectives.
The strategic alliances are generally in the forms like joint venture,
franchising, supply agreement, marketing agreement etc.
The strategic alliance agreement contains the terms like capital
contribution, infrastructure, decision making, sharing of risk and return
etc.
Techniques of Corporate Restructuring
Contd.
Joint Ventures
Joint ventures are new enterprises owned by two or
more participants.
They are typically formed for special purposes for a
limited duration.
It is a combination of subsets of assets contributed by
two (or more) business entities for a specific business
purpose and a limited duration.
Each of the venture partners continues to exist as a
separate firm, and the joint venture represents a new
business enterprise.
Techniques of Corporate Restructuring Contd.
Franchising:
Franchising provides an immediate access to business operations
and technology in profitable fields of operations.
It is an important means of doing business in several countries and
represents an effective combination of the advantages of large
business with the motivation and adaptation capabilities of small or
medium scale enterprises.
It also enables linkages of large and small businesses within a
framework of vertical division of labour.
The concept of franchising is quite comprehensive and covers an
extensive range of marketing and distribution arrangements for
goods and services.
Franchises are becoming a key mechanism for technological,
marketing and service linkages between enterprises within a
country as well as globally.
Techniques of Corporate Restructuring Contd.
Sell - Off : In a strategic planning process, a company can take
decision to concentrate on core business activities by selling off
the non core business divisions. A sell- off is a sale of part of the
organization to a third party in the following circumstances:
To come out of shortage of cash and severe liquidity problems.
To concentrate on core business activities.
To protect the firm from takeover activities by selling off the
desirable division of the bidder.
To improve the profitability of the firm by selling off loss making
divisions.
To increase the efficiency of men, machines and money.
To facilitate the promising activities with enough funds by sell-
off non-performing assets.
To reduce the business risk by selling off the high risk activities.
Techniques of Corporate Restructuring Contd.
Going Private:
In a restructure program, the management of the
widely held company may decide to go private by
purchase of stocks from the outside public and
delisting the shares in the stock exchanges where
the shares are traded.
By going private, a company can avoid the listing
fees of the stock exchanges and when the
company is in financial difficulties this will avoid
the fall in share prices.
It facilitates to avoid the declaration of
periodicals results for general public. By keeping-
off from the public, trade secrecy can be
maintained.
Techniques of Corporate Restructuring Contd.
Liquidation:
A business may go into decline when losses are
made over several years.
The losses are setoff against past profits retained
in the business (reserves), but clearly the
situation cannot continue for very long. In such
case liquidation of company may be imminent.
In case of technological obsolescence, lack of
market for the companys products, financial
losses, cash shortages, lack of managerial skills,
the owners may decide to liquidate the business
to stop further aggravation of losses. With a
strategic motive also, a business unit may be
liquidated.
Techniques of Corporate Restructuring Contd.
Reverse Merger:
Reverse mergers, as the name implies, work in reverse
whereby a small private company acquires a publicly
listed company in order to quickly gain access to
equity markets for raising capital.
Reverse mergers are a very popular way for small start-
up companies to "go public" without all the trouble
and expense of an Initial Public Offering .
The reverse merger may be motivated by tax benefit
available whenever at least one of the companies in
deal has accumulated loss or unabsorbed expenses/
allowances that can be carried forward and setoff
against future profit of the amalgamated company.
Techniques of Corporate Restructuring Contd.
Demerger/ spin off/ hiving off:
Demerger is adopted as a business strategy to separate business which
dont comfortably merge with each other. Two businesses may have
different strategies, operational or regulatory needs which are difficult to
fulfill while they are still linked. They may even be competing with each
other for business.
A demerger is a form of reorganization where business activities owned
by one company or group are separated out into several companies or
groups. Each business will usually have the same ultimate ownership as
before.
A demerger may also be step towards sale to third party.
Demerger means , for strategic reasons, a conglomerate is splitted into
two or more independent separate bodies and assets are transferred to
such bodies.
By demerging the business activities, a corporate splits into two or more
corporate bodies with separation of management and accountability.
The main reason may be for making each division as a profit centered
organization to make each head of the division to account for profitability
of their respective divisions.
Techniques of Corporate Restructuring Contd.
Management Buy Out:
MBO is the purchase of a business by its management when the existing
owners are trying to sell business to third parties due to its slow growth
or lack of managerial skills in running the business.
The existing managers will come forward to purchase and run the
business by taking it over from the owners.
In a MBO, the manager purchase all or part of the business from its
owners. The management team will take substantial controlling interest
from the existing owners who are having control over the affairs of the
company.
The management team may consist of one or more directors and
employees, either with or without inviting external associates.
It is a method of setting up of business by the management team itself.
The cases of MBO occurs when the existing owners unable to run the
company successfully and when the very existence of the company is at
stake. It is a divestment technique to sell the business which does not fit
in with the new strategic plan of the group.
Techniques of Corporate Restructuring Contd.
Management Buy In:
The management team who have got special skills will
search out and purchase business, to their interested
area, which has considerable potential but that has not
been run to its full advantage due to lack of managerial
and technical skills, fails to establish the market for the
companys products.
After the identification of suitable unit for purchase,
the management team will generally have lesser funds
for investment and therefore, debt component will be
more in their purchase of the business unit.
The MBI is just reverse to MBO. In MBI, the
management of other concern, not the management
of the same company, acquires the majority
shareholding and thus the existing management of the
concern has to leave the concern.
Techniques of Corporate Restructuring Contd.
Leveraged Buy Out:
An LBO is defined as the acquisition of an
operating company with the funds derived
primarily from debt financing, by a small group of
investors.
In LBO, debt financing typically represents 50%
or more of purchase price.
The consideration for LBO is a mix of debt and
equity components with high gearing.
The debt is secured by the assets of the acquired
firm and usually amortized over a period of less
than ten year.